Jackson Jambalaya

Two disasters took place in the mortgage industry this week. Mortgage lender Taylor, Bean, & Whitaker ceased operations and Colonial Bank became the subject of a criminal investigation. TBW was the twelfth largest lender overall and the third largest in FHA originations. HUD suspended TBW Monday from selling or servicing FHA-insured mortgages. The Wall Street Journal reported HUD terminated its relationship with TBW because "Taylor Bean failed to submit a required annual financial report and to disclose to the FHA “certain irregular transactions that raised concerns of fraud.” Thousands of borrowers found themselves stranded at the closing table as loans that had closed but not funded became worthless paper. Purchases were delayed as desperate borrowes were forced to obtain financing from other lenders. These homebuyers will probably pay more money as they will have to pay for another appraisal, a different set of fees, and a different interest rate.

While the mortgage industry can survive the closure of TBW, it will have a more difficult time surviving the closure of Colonial Bank, which is currently under a criminal investigation by the federal government. The Montgomery, Alabama-based bank is the largest issuer of credit lines to mortgage lenders nationwide.

Many mortgage companies and lenders use credit lines (also called warehouse lines) to fund mortgages. After closing, the loan "sits" on their line of credit until it is sold to a servicer such as Citi or Well Fargo. Credit lines are the lifeblood of the mortgage industry as most mortgage lending would come to a screeching halt if they disappeared. Unfortunately for the mortgage industry, The New York Times reports the feds are investigating this very part of Colonial's operations:
"In a regulatory filing, the company said the Alabama State Banking Department might appoint the Federal Deposit Insurance Corporation as receiver or conservator for its banking unit after Aug. 12.
Earlier this week, the agency that investigates misuse of federal bailout money raided Colonial’s mortgage warehouse lending division in Orlando, Fla. The Securities and Exchange Commission also issued subpoenas to the company seeking disclosures related to its participation in the Troubled Asset Relief Program and its accounting for loan-loss reserves."
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A seizure by FDIC would make Colonial the sixth-largest bank failure in American history. There are many lenders sitting on pins and needles right now. If the warehouse lending division ceased operations, these same lenders (many of which are small banks and local mortgage companies) will probably be forced out of business as Realty Mortgage was a few months ago when Bank of America cancelled its credit line. Some will say that is just an opportunity for competitors to grab market share. Such uninformed thinking ignores the fact that the resulting demand will completely overwhelm the markets capacity for underwriting, funding, and servicing mortgages. The surviving lenders don't care about market share when it takes 60 days to get a file underwritten and everyone is screaming at them for being so slow. Market share doesn't mean much when the lender's systems shut down because the demand to lock loans was twice its capacity, causing everything to crash.

What probably needs to happen is either the Fed, Fannie, or Freddie needs to prepare to start issuing lines of credit to qualified lenders. Unfortunately, this means the Fed would be regulating non-depository institutions, which is very controversial. Keep your eyes on Colonial Bank for the next few weeks as its going to determine the fate of the mortgage industry.